Why would the wealthy use Equity Release?

Posted by Knight Frank Newcastle on 12th September 2019 -

Equity Release is often seen as a last resort; a way for those short of money to solve their problems after all other options have been eliminated. But in reality, Equity Release can be a shrewd financial decision. David Forsdyke at Knight Frank Finance looks at how homeowners can benefit from Equity Release

Interest rates on Lifetime Mortgages, the most common form of Equity Release, have dropped dramatically over the last 12 months. It is now possible to secure a rate below 3%, fixed for life. For many High Net Worth individuals who have a wide range of financial assets, this makes the option of borrowing against their main residence much more attractive. 

Indeed there are a number of interesting papers about this subject. For example, Canada Life published ‘Home is where the wealth is’ in 2017 which encourages financial advisers to include and discuss using property assets alongside other sources of wealth. At Knight Frank Finance, we have helped a number of wealthy clients arrange a lifetime mortgage, for the following reasons;

• Enhancing income. Some wealthy homeowners find themselves asset rich, but cash poor. Often their wealth is tied up in their business, in fixed assets and long term investments, or in their property. During our advice process we of course discuss using their other assets rather than borrowing, but they often want to keep their money invested in order to benefit from long term substantial gains. Much depends on their attitude to risk and their knowledge of investments, but if the expectation is of a return much higher than the interest due on a mortgage, it can make sense to borrow against property rather than liquidating other assets. Knight Frank Finance are not investment advisers, but we work closely with Wealth Managers and independent financial advisers to provide a broad, holistic range of options to clients
• Tax efficiency. Pension funds benefit from certain tax advantages, and can be left to beneficiaries tax free if the individual is below the age of 75. A main residence, however, is subject to Inheritance Tax. This raises an interesting question around tax efficiency and whether it is better to draw funds from property assets rather than pension assets. There are a large number of variables involved, and whilst Knight Frank Finance are not tax or pension experts, we will work closely with our clients’ trusted advisers to find the most efficient scenario for them
• Helping the family. Older homeowners who have enjoyed many years of growth in the UK housing market now hold the vast majority of property wealth. There is a growing need for older family members to pass this wealth down to the younger generations, who are struggling to afford property on their own. Legal & General reported earlier this year that 16% of all ‘Bank of Mum and Dad’ contributions to house purchases came from Equity Release**. The redistribution of wealth down through the generations is attracting a lot of interest and we believe Equity Release has an important role to play. 

If you are considering Equity Release as part of your financial planning, and would like some advice, speak to our specialists on +44 1372 239 974 or visit our Later Life Finance page.